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BACKGROUNDER No BACKGROUNDER No. 3363 | NOVEMBER 15, 2018 Revised and Updated November 29, 2018 A State-by-State Comparison of 529 College Savings Plans Jonathan Butcher and Elizabeth Slattery Abstract As part of the Tax Cuts and Jobs Act enacted last year, federal lawmak- Key Points ers gave parents more flexibility with their own savings for their chil- dren’s education. Now, families that save money for college using what n Individuals and families should are commonly known as 529 college savings plans (named after Sec- have the ability to make decisions tion 529 of the Internal Revenue Code) can apply some of those savings about how to save and spend their hard-earned money. Inves- to pay tuition at private K–12 schools before a student finishes high tors must choose what is best for school. Because state policies and investment options are central com- their current and future needs. ponents of 529 plans, policymakers should review state laws to make n sure state rules do not interfere with the new options for students in With the Tax Cuts and Jobs Act, Washington gave families and federal tax law. Whether families and investors should use 529 savings students more options to utilize plans to pay for K–12 expenses is a decision for parents and students. their own savings. State policymakers should not interfere with parents who choose to n Families that save money for col- use their 529 savings plans to pay for K–12 education expenses. lege using 529 college savings plans can now use some of that Introduction savings to pay tuition at private As part of the Tax Cuts and Jobs Act (TCJA) enacted last year, K–12 schools—before a student federal lawmakers gave parents more flexibility with their own sav- finishes high school. 1 ings for their children’s education. Now, families that save money for n State policymakers should not college using what are commonly known as 529 college savings plans interfere with parents who (named after Section 529 of the Internal Revenue Code) can apply choose to use their 529 savings some of those savings to pay tuition at private K–12 schools before a plans to pay for K–12 educa- student finishes high school.2 tion expenses. While the tax incentives for college savings with a 529 plan are n State lawmakers should revise part of federal law, nearly every state offers at least one 529 invest- statutes to make clear that 529 ment savings plan and a prepaid college tuition plan. Generally, state accounts may be used for any treasurers operate the savings options in conjunction with private expenses authorized by any sec- tion of 529. State statutes should investment services. Families and students can save money in any be written to automatically align with any future changes to this This paper, in its entirety, can be found at http://report.heritage.org/bg3363 section of federal code. The Heritage Foundation 214 Massachusetts Avenue, NE Washington, DC 20002 (202) 546-4400 | heritage.org Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress. BACKGROUNDER | NO. 3363 NOVEMBER 15, 2018 state’s 529 savings plan and use the money to attend $10,000 per year per child made to pay for K–12 pri- college anywhere in the country (although for 529 vate school tuition.6 Families can now save money in prepaid tuition plans, the savings must be used at 529 plans and use the funds, without tax penalty, for the pre-selected college). The changes in the TCJA only apply to 529 investment plans. For example, n College tuition; Nevada has several 529 savings plans with invest- ment options from Vanguard to USAA.3 As a separate n College room and board; option, Nevada allows families to prepay tuition at in-state colleges at today’s tuition rates. n College activity fees that must be paid as a condi- With 529 savings plans—as opposed to prepaid tion of enrollment; tuition plans—parents and students have several options for saving and then using money for college. n College books, supplies, and “equipment needed Families can choose any state’s 529 savings plan, for a course of study”; regardless of where they live. Parents and families choose a plan, deposit money, and select an invest- n Computer hardware and any costs related to Inter- ment option, much like the process for saving for net access for college classes; and retirement in an Individual Retirement Account or 401(k). With a 529 savings plan, the earnings are n Tuition at private K–12 schools, up to $10,000 per not subject to federal taxes if the money is used for year.7 eligible post-secondary—and now K–12—expenses.4 From the perspective of federal taxes, families real- Use of 529 plans has grown remarkably since fed- ize tax savings after they withdraw money from the eral lawmakers created the option in 1996. Accord- accounts. Some states allow taxpayers to deduct 529 ing to the Investment Company Institute, families plan contributions from their income when they file have opened some 12 million 529 accounts around their taxes, usually if a state resident chooses to invest the country—with total assets topping $293 billion.8 in his or her state’s 529 savings plan. In this way, fami- The number of accounts has doubled since 2005, and lies saving with a 529 plan in a state that offers a tax a Wall Street Journal headline says the “plans are even deduction can realize tax savings before they make hotter after [the] tax overhaul.”9 withdrawals—while they are still putting money away Because state policies and investment options are for the future.5 central components of 529 plans, in many states, poli- The federal tax law changed 529 plans by expand- cymakers are reviewing state laws to evaluate wheth- ing the tax benefits to include withdrawals of up to er they interfere with the new options for students 1. Lindsey M. Burke and Jonathan Butcher, “Improved and Expanded 529 College Savings Plans Create More Opportunities for Families,” Heritage Foundation Backgrounder No. 3274, December 27, 2017, https://www.heritage.org/sites/default/files/2017-12/BG3274.pdf. 2. Tax Cuts and Jobs Act of 2017, Public Law 115–97. 3. Nevada State Treasurer, “Nevada College Savings Plans,” http://www.nevadatreasurer.gov/CollegeSavings/CSP_Home/ (accessed November 3, 2018). 4. Internal Revenue Service, “529 Plans: Questions and Answers,” https://www.irs.gov/newsroom/529-plans-questions-and-answers (accessed November 3, 2018). 5. While this is reasonable state policy, it would be bad federal policy because it would subsidize college savings—an improper role for Washington. 6. 26 U.S. Code § 529(c)(7). 7. U.S. Department of the Treasury, Internal Revenue Service, “529 Plans: Questions and Answers,” https://www.irs.gov/newsroom/529-plans- questions-and-answers (accessed November 3, 2018), and U.S. Department of the Treasury, Internal Revenue Service, “Publication 970: Tax Benefits for Education,” https://www.irs.gov/pub/irs-pdf/p970.pdf (accessed November 3, 2018). 8. Investment Company Institute, “529 Plan Data: December 2017,” May 2, 2018, https://www.ici.org/research/stats/529s/529s_17_q4 (accessed November 3, 2018). 9. Laura Saunders, “529 College-Savings Plans Are Even Hotter After Tax Overhaul,” The Wall Street Journal, January 5, 2018, https://www.wsj. com/articles/education-savings-plans-are-even-hotter-aftertax-overhaul-1515160800 (accessed November 3, 2018). 2 BACKGROUNDER | NO. 3363 NOVEMBER 15, 2018 CHART 1 529 College Savings Plans NUMBER OF 529 COLLEGE SAVINGS PLANS, TOTAL 529 COLLEGE SAVINGS PLAN ASSETS, IN MILLIONS IN BILLIONS OF U.S. DOLLARS $293.9 12.2 2.9 $18.5 SOURCE: Investment Company Institute, “529 Plan Data: December 2017,” May 2, 2018, https://www.ici.org/research/stats/529s/529s_17_q4 (accessed October 16, 2018). BG3363 heritage.org under federal tax law. In 2018, it is common to find a However, in New York, eligible 529 expenses are message on state 529 plan websites that says federal defined as “any qualified higher education expense “legislation includes several new provisions related included in section 529 of the Internal Revenue Code specifically to 529 plan accounts,” and the website of 1986, as amended.”12 Because the definition speci- will “provide more information as additional details fies that the withdrawal must be for a higher education about the effects of the tax bill become clear.”10 expense, this language appears to prevent account Specifically, state policymakers are reviewing state holders from using account funds for K–12 expenses. definitions for eligible 529 expenses to determine if the Under current law, New York could levy a financial addition of K–12 private school tuition in federal law penalty or tax the money after it is withdrawn. conflicts with state law. For example, in Rhode Island, Some states, then, will need to revise their laws in the state law governing 529 accounts says a quali- order to provide parents and students with the option fied higher education expense includes “tuition, fees, to use their own savings to realize the full benefits of books, supplies and equipment required for enroll- 529 savings plans under federal law. ment or attendance at an institution of higher educa- A few states have done so already. In Louisi- tion, and other education costs defined by federal law.”11 ana, lawmakers created a new 529 savings program This language appears to allow 529 account holders called START K12, which “allows families to save for in Rhode Island to use their savings for K–12 private tuition expenses related to attendance at any Loui- school tuition without a state tax penalty.
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